RCM on Government Services

1. Sec. 9(3) of the CGST Act, 2017 as well as Sec. 5(3) of the IGST Act, 2017 grants power to the Government, on the recommendations of the GST Council, to specify the categories of supplies of goods or services or both in respect of which the tax shall be payable by the recipient and not the supplier. This mechanism of collecting the tax from the recipient is commonly referred as reverse charge mechanism (“RCM”). Notification No. 13/2017-Central Tax (Rate) dt. 28.06.2017 as well as Notification No. 10/2017-Integrated Tax (Rate) dt. 28.06.2017 have been issued by exercising the powers conferred by the referred provisions specifying the services as well as the category of the recipients who are made liable to pay the tax under RCM.

2. Two entries under the said notifications are very relevant and often misunderstood and hence not complied. Let us first reproduce the said entries and then discuss it in detail:

Sr. No. of NN 13/2017-CT (Rate)	Category of supply of Services	Supplier of Service	Recipient of Service
5	Services supplied by the Central Government, State Government, Union territory or local authority to a business entity excluding, – (1) renting of immovable property, and (2) services specified below- (i) services by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than Central Government, State Government or Union territory or local authority; (ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport; (iii) transport of goods or passengers.	Central Government, State Government, Union territory or local authority	Any business entity located in the taxable territory.
5A (came into effect from 25.01.2018)	Services supplied by the Central Government, State Government, Union territory or local authority by way of renting of immovable property to a person registered under the Central Goods and Services Tax Act, 2017 (12 of 2017)	Central Government, State Government, Union territory or local authority	Any person registered under the Central Goods and Services Tax Act, 2017

3. Above referred entry at Sr. No. 5 stipulates that the tax on supply of the services by Central Government, State Government, Union territory or local authority to a business entity shall be payable by the said business entity which is the recipient of such supply. However said entry excludes services by way of renting of immovable property (see discussion on entry at Sr. No. 5A below in this regard), certain services by Department of Posts, services in relation to an aircraft or a vessel inside or outside the precincts of a port or an airport as well as services of transport of goods or passengers. Hence tax, if any, leviable on such exceptions shall be payable by the supplier and not the business entity receiving the said services.

4. Above referred entry at Sr. No. 5A, which has been inserted vide Notification No. 3/2018-Central Tax (Rate) made applicable from 25.01.2018, provides that the tax in respect of services by way of renting of immovable property by the Central Government, State Government, Union territory or local authority to any person registered under the CGST Act, 2017 shall be payable by the recipient who is registered. It may be noted that before 25.01.2018, services by way of renting of an immovable property was not covered under RCM if supplied to a business entity vide the exceptions in the entry at Sr. No. 5 discussed above. Hence tax on such supply before 25.01.2018 was payable by the Central Government, State Government, Union territory or local authority.

5. It must be noted that one needs to also examine the taxability of services in question, which have not been expressly excluded vide Sr. No. 5 (supra), to determine whether the tax shall be payable by the business entity or not. Tax shall not be payable in respect of services which have been specifically exempted.

6. One needs to also examine the concept of “sovereign functions” to determine whether the transaction in question can be considered as supply of “services” or not.

7. With the above brief background, let us now examine in detail following questions:

A. What is the meaning of the terms “Central Government”, “State Government”, “Union territory” or “local authority” ?

B. Which activities can be considered as the “sovereign functions” and whether the same are exempted from tax ?

C. Which are the services provided by the Government or the local authority specifically exempted from tax ?

MEANING OF THE TERMS “CENTRAL GOVERNMENT”, “STATE GOVERNMENT”,” UNION TERRITORY” OR “LOCAL AUTHORITY”

8. Now the terms “Central Government”, “State Government” or “Union Territory” have not been defined in the any of the GST Act’s or Rule’s issued thereunder. As per Sec. 3(8) of the General Clauses Act, 1897 the term “Central Government” shall mean the President amongst other things. As per Article 53 of the Constitution, the executive power of the Union shall be vested in the President and shall be exercised by him either directly or indirectly through officers subordinate to him in accordance with the Constitution. Further, in terms of Article 77 of the Constitution, all executive actions of the Government of India shall be expressed to be taken in the name of the President. Therefore the term “Central Government” shall cover the President and any department of the executive (central) which takes action in the name of the President. Similarly the term “State Government” as defined u/s 2(60) of the General Clauses Act, 1897 read with Article 154 as well as Article 166 of the Constitution shall mean the Governor as well as any department of the executive (state) which takes action in the name of the Governor. Similar meaning has to be ascribed to the term “Union Territory”. Hence various departments of the Government such as health, commerce, finance, revenue, law, etc. shall covered by the above terms.

9. Now the term “local authority” has been defined u/s 2(69) of the CGST Act, 2017. Same reads as under:

“(69) “local authority” means —

(a) a “Panchayat” as defined in clause (d) of article 243 of the Constitution;

(b) a “Municipality” as defined in clause (e) of article 243P of the Constitution;

(c) a Municipal Committee, a Zilla Parishad, a District Board, and any other authority legally entitled to, or entrusted by the Central Government or any State Government with the control or management of a municipal or local fund;

(d) a Cantonment Board as defined in section 3 of the Cantonments Act, 2006 (41 of 2006);

(e) a Regional Council or a District Council constituted under the Sixth Schedule to the Constitution;

(f) a Development Board constituted under article 371 [and article 371J] of the Constitution; or

(g) a Regional Council constituted under article 371A of the Constitution;”

10. Hence only the bodies referred in the above definition shall constitute “local authority”. For example, State Governments have setup local developmental authorities to undertake developmental works like infrastructure, housing, residential & commercial development, construction of houses, etc. The Government’s setup these authorities under the Town and Planning Act. Examples of such developmental authorities are Delhi Development Authority, Ahmedabad Development Authority, Bangalore Development Authority, Chennai Metropolitan Development Authority, Bihar Industrial Area Development Authority, etc. Such developmental authorities formed under the Town and Planning Act are not qualified as local authorities for the purposes of the GST Acts.

11. This also brings us to an interesting question with respect to statutory body, corporation or an authority created by the Parliament or a State Legislature. Are such bodies Government or local authority ? Such statutory bodies, corporations or authorities are normally created by the Parliament or a State Legislature in exercise of the powers conferred under article 53(3)(b) and article 154(2)(b) of the Constitution respectively. It is a settled position of law (Agarwal Vs. Hindustan Steel AIR 1970 Supreme Court 1150) that the manpower of such statutory authorities or bodies do not become officers subordinate to the President under article 53(1) of the Constitution and similarly to the Governor under article 154(1). Such a statutory body, corporation or an authority as a juridical entity is separate from the State and hence cannot be regarded as the Central or a State Government and also do not fall in the definition of ‘local authority’. Thus, regulatory bodies and other autonomous entities would not be regarded as the government or local authorities for the purposes of the GST Acts.

12. Thus we can conclude that for a service to fall under RCM, it must be provided by the Central Government, State Government, Union territory or local authority. Any service provided by an entity not falling within the said terms, as examined above, shall not be covered Sr. No. 5 or 5A (supra).

CONCEPT OF SOVEREIGN FUNCTION

13. Payment of tax under RCM is on the supply of “services”. In this context can it be said that certain activities (referred as sovereign functions) carried out by the Central Government, State Government, Union territory or local authority in the capacity of a “sovereign” cannot be regarded as “services” and hence cannot be brought to tax ? This is because such functions are the inherent duty casted on the Government by the Constitution and hence even if any tax/fee is charged for the same, can it still be termed as a “service” supplied by the Government ? Before we examine the issue it is worthwhile to understand the term “sovereign functions”.

14. Seven judges’ Bench of the Hon. Supreme Court in the case of Bangalore Water Supply and Sewerage Board v. A. Rajappa, [1978] 2 SCC 213 had an occasion to examine as to what can be considered as a “sovereign function” in connection with a dispute under the Industrial Disputes Act, 1947.

15. There was a difference of opinion in the said case between the Judges as to what can be considered as a “sovereign function”. By majority a restricted meaning was given to the said term to only include specified categories of so called ‘inalienable functions’ like defense, making peace or war, foreign affairs, acquisition of a territory and the like where the State is not answerable to the Courts.

16. After more than 27 years in 2005 Hon. Supreme Court in the case of State of UP v. Jai Bir Singh (Appeal (Civil) 897 of 2002) expressed doubts on the earlier decision and observed as under:

“The concept of sovereignty in a constitutional democracy is different from the traditional concept of sovereignty which is confined to ‘law and order’, ‘defense’, ‘law making’ and ‘justice dispensation’. In a democracy governed by the Constitution the sovereignty vests in the people and the State is obliged to discharge its constitutional obligations contained in the Directive Principles of the State Policy in Part -IV of the Constitution of India. From that point of view, wherever the government undertakes public welfare activities in discharge of its constitutional obligations, as provided in part-IV of the Constitution, such activities should be treated as activities in discharge of sovereign functions falling outside the purview of ‘industry’.”

17. In view of conflict with the earlier decision Hon. Chief Justice has now referred the matter to a nine-judge bench. The final decision is pending as on date. Hence the scope of what can be considered as “sovereign functions” is very much in doubt. Even if a broad definition is accepted (which covers even activities of public welfare), one should not lose sight of certain express provisions in the GST Acts which we shall now delve into.

18. Levy of tax is clearly on the “supply”. Scope of supply is given u/s 7 of the CGST Act, 2017. Sec. 7(1)(a) includes all forms of supply made for a consideration in the course or furtherance of business. Further the clause (i) given in the definition of business u/s 2(17) is relevant and hence reproduced below:

“(17) “business” includes —

(i) any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities”

19. Combined reading of Sec. 7(1)(a) along with the definition of business u/s 2(17)(i) leads to the conclusion that any activity or transaction undertaken by the Government in which they are engaged as public authorities irrespective of the intent behind such transaction shall constitute a supply leviable to tax if it is made against a consideration.

20. Further Sec. 7(2)(b) provides that only the activities or functions, undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, which have been notified by the Government on the recommendations of the Council, shall not be regarded as supply of goods or supply of services. Hence unless separately notified, functions carried out by the Government against consideration shall constitute a “supply” which shall be exigible to tax. One may also rely on the decision of Bombay High Court in the case of Builders Association of Navi Mumbai Union of India [Writ Petition No. 12194/2017, decided on 28-3-2018] wherein the Court observed that the default position is that all activities or transactions undertaken by Central Government or State Governments or local bodies are taxable under GST and it is only by way of a specific exemption notification that their activities or transactions can claim immunity from GST. In the given case since no exemption notification was issued (at that point in time), lease premium charged by CIDCO was held to be liable to tax.

21. One may also consider history of the development of the issue before us. Before the passage of the Finance Act, 2015 the scope of taxable services provided by the Government/Local Authority to business entities was restricted to only “support services” (see Section 66D(a) of FA, 1994). Scope of said “support services” was clarified vide para no. 4.1.7 of the Service Tax Education Guide as under:

“Thus services which are provided by government in terms of their sovereign right to business entities, and which are not substitutable in any manner by any private entity, are not support services e.g. grant of mining or licensing rights or audit of government entities established by a special law, which are required to be audited by CAG under section 18 of the Comptroller and Auditor-General’s (Duties, Powers and Conditions of Service) Act, 1971 (such services are performed by CAG under the statue and cannot be performed by the business entity themselves and thus do not constitute support services).”

22. Even before the said Education Guide, the CBEC vide Circular No. 89/7/2006 – S.T dated December 18, 2006 had clarified that fee collected by sovereign/public authorities while performing statutory functions/duties under the provision of law would not be exigible to Service tax. Said circular reiterated an established principle that payment/fee levied and collected by Government authorities under the mandate of a statute are in the nature of compulsory levy and cannot be treated as provision of any service (by such Government authority) to any person/ entity for a consideration.

23. The term “support services” in Section 66D(a)(iv) was omitted and replaced by “any service” vide the Finance Act, 2015 and corresponding amendments to Rule 2(1)(d)(i)(E) of the Service Tax Rules, 1994 (vide Notification No. 05/2015- S.T. dated March 01, 2015) and clause (I)(A)(iv)(C) and Sr. No. 6 of Table of Notification No. 30/2012 – S.T. dated June 20, 2012 (vide Notification No. 07/2015 – S.T. dated March 01, 2015) were also undertaken. Consequent to this, in the Budget of 2016-17, both the amendments were brought into force from April 01, 2016 through Notification No. 17/2016 – S.T. dated March 01, 2016 and Notification No. 16/2016 – S.T dated March 01, 2016 respectively. Hence intent was to bring all the services to tax unless specifically excluded.

24. To clarify the scope of the amendment, Circular No. 192/02/2016 – Service Tax dated April 13, 2016 came to be issued which provided inter alia that any activity undertaken by the Government or a local authority against a consideration shall constitute a service and the amount charged for performing such activities shall be liable to Service Tax. It further provided that it was immaterial whether such activities are undertaken as a statutory or mandatory requirement under the law and irrespective of whether the amount charged for such service was laid down in a statute or not. As long as the payment is made (or fee charged) for getting a service in return (i.e., as a quid pro quo for the service received), it has to be regarded as a consideration for that service and shall be taxable irrespective of by what name such payment is called. Further it provided that circular No. 89/7/2006- Service Tax dated December 18, 2006 was no longer valid.

25. Hence a clear intention to bring all the services provided by the Government (whether sovereign function, mandatory function or otherwise) against a consideration to tax (unless specifically exempted) was manifested. Only taxes, cesses or duties levied which are not specifically a consideration against a particular service shall not be leviable to tax.

26. From the above discussion we can thus conclude that all the activities performed by the Government or the local authority against a consideration shall be liable to tax unless the same is specifically excluded. Since such services (except certain exceptions provided in Sr. No. 5 (supra)) are under RCM, the tax on the same shall be payable by the business entity which receives such services.

EXEMPTIONS

27. Above conclusions now brings us to exemptions. Which are the services which have been exempted from the levy of tax itself so that even the recipient is not required to pay the same under RCM ?

28. Please find below the list of services provided by the Central Government, State Government or the local authority which have been exempted from the tax vide several entries in Notification No. 12/2017- Central Tax (Rate). Our comments are also given against respective entries.

Sl. No. in the Not. 12/2017	Description of Services	Our comments
4	Services by governmental authority by way of any activity in relation to any function entrusted to a municipality under article 243W of the Constitution.	The term “governmental authority” has been defined under para (zf) of Not. 12/2017 to mean an authority or a board or any other body, – (i) set up by an Act of Parliament or a State Legislature; or (ii) established by any Government, with 90 per cent or more participation by way of equity or control, to carry out any function entrusted to a Municipality under article 243 W of the Constitution or to a Panchayat under article 243 G of the Constitution. Article 243W and Article 243G of the Constitution enlists certain activities which are to be carried out by the Municipality or the Panchayat. Such activities if carried out by the governmental authority shall be exempted from tax. As an example regulation of land-use, construction of buildings and other services listed in the Twelfth Schedule to the Constitution which have been entrusted to Municipalities under Article 243W of the Constitution, when provided by governmental authority will be exempt from payment of tax. It may be noted that only services supplied by Central Government, State Government & local authority have been placed under RCM. Hence any taxable services (i.e. not covered under Article 243W or 243G) supplied by a governmental authority shall be taxed under forward charge.
5	Services by a Governmental Authority by way of any activity in relation to any function entrusted to a Panchayat under article 243G of the Constitution.	Please read the above comments.
6	Services by the Central Government, State Government, Union territory or local authority excluding the following services — (a) services by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than the Central Government, State Government, Union territory; (b) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport; (c) transport of goods or passengers; or (d) any service, other than services covered under entries (a) to (c) above, provided to business entities.	It can be observed that vide the said entry all the services supplied by the Central Government, State Government, Union territory or local authority shall be exempted except certain services. Clause (d) clearly provides that any service other than those mentioned under clause (a) to (c) shall be taxable if provided to a business entity. One can contrast the said entry with the Sr. No. 5 of RCM notification referred earlier. Combined reading thus provides that services stipulated under clause (a) to (c) shall be taxed under forward charge and all other services provided to a business entity shall be taxed under reverse charge (unless specifically exempted under any of the below mentioned entries).
7	Services provided by the Central Government, State Government, Union territory or local authority to a business entity with an aggregate turnover of up to twenty lakh rupees (ten lakh rupees in case of a special category state) in the preceding financial year. Explanation – For the purposes of this entry, it is hereby clarified that the provisions of this entry shall not be applicable to – (a) services, – (i) by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than the Central Government, State Government, Union territory; (ii) in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport; (iii) of transport of goods or passengers; and (b) services by way of renting of immovable property.	An exception has been carved out from the preceding entry to provide that services provided by the Central Government, State Government, Union territory or local authority to a business entity, with an aggregate turnover of up to twenty lakh rupees (ten lakh for special category state) in the preceding financial year, shall be exempt. This has been done to obviate the need for obtaining compulsory registration (u/s 24(iii)) for those business entities which otherwise are not liable to tax (enjoying threshold exemption). It must also be noted that even though the said exclusion does not apply to services by way of renting of immovable property, it would not mean that the business entity having turnover below the threshold must seek registration for payment of tax under RCM. This is because the entry at Sr. No. 5A under RCM notification with respect to renting of immovable property only makes the registered recipients liable to tax. Hence a recipient, otherwise not liable for registration, shall not be made liable for payment of tax under RCM on such receipt of renting services from the Government.
8	Services provided by the Central Government, State Government, Union territory or local authority to another Central Government, State Government, Union territory or local authority: Provided that nothing contained in this entry shall apply to services – (i) by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than the Central Government, State Government, Union territory; (ii) in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport; (iii) of transport of goods or passengers.	Inter-governmental provision of services have been granted exemption vide the said entry. However certain services shall continue to remain taxable on forward charge basis even if provided to another Government/local authority.
9	Services provided by Central Government, State Government, Union territory or a local authority where the consideration for such services does not exceed five thousand rupees: Provided that nothing contained in this entry shall apply to – (i) services by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than the Central Government, State Government, Union territory; (ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport; (iii) transport of goods or passengers: Provided further that in case where continuous supply of service, as defined in sub-section (33) of section 2 of the Central Goods and Services Tax Act, 2017, is provided by the Central Government, State Government, Union territory or a local authority, the exemption shall apply only where the consideration charged for such service does not exceed five thousand rupees in a financial year	This entry grants exemption to the services provided by Central Government, State Government, Union territory or a local authority where the consideration for such services do not exceed INR 5,000/-. As an example the application fee for an advance authorization upto INR 5,000/- shall be exempt. However if the application fee exceeds INR 5,000/-, it shall be liable to tax under RCM. A view may be taken that the said “fee” is a compulsory extraction by the Government under the statute and hence cannot constitute a “service”. However adopting the said view is not advisable given our earlier discussions that any amount charged (quid pro quo) for some activity (whether statutory or mandatory) will be held as a service.
9C	Supply of service by a Government Entity to Central Government, State Government, Union territory, local authority or any person specified by Central Government, State Government, Union territory or local authority against consideration received from Central Government, State Government, Union territory or local authority, in the form of grants.	This exemption deals with services supplied by a Government Entity to Central Government, State Government, Union territory, local authority or any other specified person against the grants given by such Government or local authority.
34A	Services supplied by Central Government, State Government, Union territory to their undertakings or Public Sector Undertakings (PSUs) by way of guaranteeing the loans taken by such undertakings or PSUs from the banking companies and financial institutions.	This entry grants exemption to the services given by Central Government, State Government, and Union territory of guaranteeing the loans taken by the Government undertakings.
42	Services provided by the Central Government, State Government, Union territory or local authority by way of allowing a business entity to operate as a telecom service provider or use radio frequency spectrum during the period prior to the 1st April, 2016, on payment of licence fee or spectrum user charges, as the case may be.	This entry grants exemption to the Services provided by the Central Government, State Government, Union territory or local authority by way of allowing a business entity to operate as a telecom service provider or use radio frequency spectrum during the period prior to the 1st April, 2016, on payment of licence fee or spectrum user charges, as the case may be.
47	Services provided by the Central Government, State Government, Union territory or local authority by way of- (a)  registration required under any law for the time being in force; (b) testing, calibration, safety check or certification relating to protection or safety of workers, consumers or public at large, including fire license, required under any law for the time being in force	This entry grants exemption to the services provided by the Central Government, State Government, Union territory or local authority by way of any registration required under any law. It also grants exemptions for testing, calibration, safety check or certification services relating to protection or safety of workers, consumers or public at large, including fire license, required under any law for the time being in force. Hence fees paid to MCA for registration of a company shall get covered under the said entry as the same is towards registration under a law. However the fees paid for raising the authorized share capital seems to be not covered by the said entry.
61	Services provided by the Central Government, State Government, Union territory or local authority by way of issuance of passport, visa, driving licence, birth certificate or death certificate.	Said entry grants exemption to the services provided by the Central Government, State Government, Union territory or local authority by way of issuance of passport, visa, driving licence, birth certificate or death certificate. Hence fees paid by a business entity for obtaining a visa for an official travel of its employee shall be exempted from payment of tax under RCM.
62	Services provided by the Central Government, State Government, Union territory or local authority by way of tolerating non-performance of a contract for which consideration in the form of fines or liquidated damages is payable to the Central Government, State Government, Union territory or local authority under such contract.	It may be noted that a separate consideration received against tolerating non-performance also constitutes a supply which is liable to tax. Exemption has been granted to the consideration payable in the form of fines or liquidated damages to the Central Government, State Government, Union territory or local authority for tolerating non-performance. It may be noted that whether such toleration of non-performance can tantamount to a separate supply or not depends on the terms of the contract. Any amount voluntarily reduced by the supplier as per the agreed terms of the contract due to deficiency can be treated as an adjustment in the original value of supply and not as a separate supply.
63	Services provided by the Central Government, State Government, Union territory or local authority by way of assignment of right to use natural resources to an individual farmer for cultivation of plants and rearing of all life forms of animals, except the rearing of horses, for food, fibre, fuel, raw material or other similar products	Said entry grants exemption to the services by way of assignment of right to use natural resources (e.g. forest) provided by the Central Government, State Government, Union territory or local authority to an individual farmer for cultivation of plants and rearing of all life forms of animals, except the rearing of horses, for food, fibre, fuel, raw material or other similar products.
64	Services provided by the Central Government, State Government, Union territory or local authority by way of assignment of right to use any natural resource where such right to use was assigned by the Central Government, State Government, Union territory or local authority before the 1st April, 2016: Provided that the exemption shall apply only to tax payable on one time charge payable, in full upfront or in instalments, for assignment of right to use such natural resource	Similar to the exemption for telecom licence, said entry grants exemption to the services provided by the Central Government, State Government, Union territory or local authority by way of assignment of right to use any natural resource where such right to use was assigned by the Central Government, State Government, Union territory or local authority before the 1st April, 2016. GST shall hence be payable where the rights are assigned on or after 01.07.2017.
65	Services provided by the Central Government, State Government, Union territory by way of deputing officers after office hours or on holidays for inspection or container stuffing or such other duties in relation to import export cargo on payment of Merchant Overtime charges	Said entry provides exemption to the services provided by the Central Government, State Government, Union territory by way of deputing officers after office hours or on holidays for inspection or container stuffing or such other duties in relation to import export cargo on payment of Merchant Overtime charges. Hence a business entity paying such charges shall not be liable to pay the tax on the same under RCM.
65B	Services supplied by a State Government to Excess Royalty Collection Contractor (ERCC) by way of assigning the right to collect royalty on behalf of the State Government on the mineral dispatched by the mining lease holders. Explanation- “mining lease holder” means a person who has been granted mining lease, quarry lease or license or other mineral concession under the Mines and Minerals (Development and Regulation) Act, 1957 (67 of 1957), the rules made thereunder or the rules made by a State Government under sub-section (1) of section 15 of the Mines and Minerals (Development and Regulation) Act, 1957.	Said entry grants exemption to the services supplied by a State Government to Excess Royalty Collection Contractor (ERCC) by way of assigning the right to collect royalty on behalf of the State Government on the mineral dispatched by the mining lease holders. It must be noted that the said entry does not per se grant exemption from payment of tax on the royalty paid to the State Government by the mining lease holders. Only services supplied to ERCC is exempted. It must however be noted that the issue of whether such royalty amounts to tax or not is pending before the nine-judge bench of the SC in the case of Mineral Area Development Authority v. Steel Authority of India (2011) 4 SCC 450.

29. As seen from the foregoing table, only certain services supplied by the Central Government, State Government, Union territory or local authority have been exempted from tax. All other services provided to a business entity shall be liable to tax and the said tax has to be paid by the business entity under RCM. As an example, the Karnataka Cricket Association, Bangalore requests the Commissioner of Police, Bangalore to provide security in and around the Cricket Stadium for the purpose of conducting the cricket match. The Commissioner of Police arranges the required security for a consideration. In this case, services of providing security by the police personnel are not exempt. As the services are provided by Government, Karnataka Cricket Association is liable to pay the tax on the amount of consideration paid under reverse charge mechanism.

30. Before we conclude we must also address an apparent controversy as regard to the situation wherein a transaction can fall under two or more exemption entries. As an example let us say that registration fees amounting to INR 7,000/- has been paid by a business entity for obtaining a registration under a statute. Now entry at Sr. No. 9 (supra) grants exemption only if the consideration paid does not exceed INR 5,000/-. However entry at Sr. No. 47 grants exemption to any amount of registration fees paid under any statute. In such case can the business entity avail exemption under Sr. No. 47 ?

31. The legal position in such situation has been clarified by Hon’ble Supreme Court in many cases that if there are two or more exemption notifications (entries in our case) available to an assessee, the assessee can claim the one that is more beneficial to him. Following case laws may be referred:

i. C.L. Limited vs Collector of Customs [2001 (130) ELT 405 (SC)]

ii. Collector of Central Excise, Baroda vs Indian Petro Chemicals [1997 (92) ELT 13 (SC)]

iii. Share Medical Care vs Union of India reported at 2007 (209) ELT 321 (SC)

iv. CCE vs Maruthi Foam (P) Ltd. [1996 (85) RLT 157 (Tri.) as affirmed by Hon’ble Supreme Court vide 2004 (164) ELT 394 (SC)

32. Hence we are of the opinion that the business entity in question can surely claim exemption under Sr. No. 47.

CONCLUSION

33. Above discussions will thus show that careful attention needs to be paid to various payments made to Government or the local authorities. It is possible that some of the payments made to these entities are liable to tax under RCM. Missing such compliance can entail higher cost by way of interest and also penalty with an added litigation on the allowability of ITC of such tax after its payment. Hence it is suggested that such payments must be parked in a separate ledger and the same must be closely examined periodically against the above list of exemptions to ensure that the tax, if due, is discharged in time. It may also be noted that the issuance of invoice u/s 31(3)(f) of the CGST Act, 2017 is must (if the supplier is unregistered) where the tax is paid under RCM as the ITC claim will be allowed on the said document.

(Views are strictly personal)